Mutual Funds Nearing the $2-Trillion Mark : Investment: Some find continuing flood of cash into the funds alarming; others see it as way of future.

NEW YORK — The time is fast approaching when Americans will have more savings invested in mutual funds than they do in banks.

Only three years after the total assets of mutual funds broke the $1-trillion mark, they are closing in on $2 trillion. At the end of July, they stood at $1.85 trillion, as reported by the Investment Company Institute.

By contrast, figures collected by the Federal Reserve, tracking the money supply, show just slightly more than $2 trillion reposing in savings accounts and small time-deposits in the banking system.

"The amount of money that has been flooding into mutual funds is mind-boggling," says Eric Miller, chief investment officer at the Wall Street firm Donaldson, Lufkin & Jenrette.

While almost nobody disagrees with that assessment, the question of whether mutual fund mania is a purely positive development is another matter.

In many ways, most observers say, it represents a healthy awakening of interest in the stock and bond markets among a population that needs to adapt its savings and investment efforts to modern economic conditions.

As the onus for retirement saving, for instance, shifts more and more from employers to individuals, it may not be enough any more just to squirrel away a little money in a traditional savings account--now paying interest at a rate of 2.5% to 3%.

After inflation and taxes, in fact, that's practically no return at all, or maybe even a net negative.

What's more, the mutual-fund industry appears to have demonstrated that it has a product to offer that suits the needs of the times.

Nevertheless, when any financial trend gathers as much momentum as this one has, it raises big doubts and worries.

"A fundamental rule of investment fads is that Wall Street not only feeds the animals what they are ravenous for, but crams it down their throats as well," says Raymond F. DeVoe Jr., a veteran analyst at Legg Mason Wood Walker Inc.

"A bull market based on cash in-flows can end suddenly if the flow is cut off due to some external event," warns Yale Hirsch, an investment adviser in Old Tappan, N.J.

Many optimistic fund-watchers agree that the boom is due for some sort of setback sooner or later. Even after it comes, however, they argue that the funds will retain a large measure of the new business they have attracted in recent years.

Part of the reason for the industry's prosperity, the reasoning goes, transcends economic and market cycles to reflect the aging of the nation's population, as the "baby boomers" turn gray.

"By the end of this decade, there will be more Americans over the age of 60 than teen-agers," says the Chicago Corp., a regional brokerage firm.

"The most significant effect of this demographic trend will be the maturing population's transition from net debtors to net savers, leading to massive private investment."

The economy, meanwhile, is helping to foster this shift with a persistent pattern of "slow but sustained growth," in the words of Alan Gottlieb, president of the investment management firm of Reynders, Gray & Gottlieb in New York.

"Low levels of inflation and low rates of interest are conducive to stable markets," Gottlieb says.

But no matter how strong its driving forces, the fund boom is keeping a lot of financial experts in a state of alert for trouble.

"The bulls could be in charge until interest rates change significantly or something jolts investor confidence--neither of which seems likely to occur in the immediate future," says Miller at Donaldson Lufkin.

But, he adds: "We do think that goings-on in the mutual-fund area deserve close monitoring."